Smart Contracts

2 August 2023

6m read


What Does a Smart Contract Mean?

A smart contract is a type of digital contract that is created using code, saved on a blockchain, and carried out instantly and without the need for a middleman. Smart contracts, which are based on blockchain technology and make use of its security and transparency, give users a mechanism to enforce agreements and streamline numerous operations.
Without the need for a third party to monitor the buyer and seller's compliance with the contract, smart contracts are especially helpful when two parties are transacting directly with one another. Imagine you're looking to purchase some digital art. Traditionally, an art gallery will have to serve as the middleman in this transaction.
A smart contract employs computer code to autonomously execute and enforce the terms of the agreement rather than relying on this middleman. It functions as a fictitious "if-then" expression. The smart contract, for instance, gives the buyer ownership of the digital artwork in exchange for sending the agreed-upon sum of money.
Since smart contracts are built using blockchain technology, they are decentralized and unchangeable once they are implemented. Because other users on the blockchain may check the transactions and confirm that the contract is carried out as planned thanks to this system, they are secure and trustworthy.

What Purposes Do Smart Contracts Serve?

Smart contracts have applications besides just purchasing and selling goods. By facilitating the development of novel use cases that are not feasible with conventional systems, they can raise the likelihood that blockchain will be widely adopted. Typical use cases nowadays include:

Financial exchanges

Smart contracts can be used to execute more complicated financial agreements like futures in a direct peer-to-peer fashion, as well as safe and automated financial transactions like payments, transfers of digital currency, and futures.

Decentralized software

Many decentralized applications (DApps) are supported by smart contracts. These DApps cover a wide range of features, such as platforms for decentralized finance (DeFi) that enable lending, borrowing, and trading as well as gaming platforms that use non-fungible tokens (NFTs) for in-game items and virtual collectibles.
The smart contract NFT systems use the programmability and security of smart contracts on blockchain networks to enable the creation, ownership, and trading of distinctive digital assets as tokenized goods.


By automating claims processing, confirming eligibility, and facilitating reimbursements based on predetermined circumstances, smart contracts can streamline the insurance process. This can streamline operations, increase productivity, and increase transparency in the insurance sector.

Supply chain administration

Smart contracts can ensure transparency, and traceability, and reduce fraud by monitoring and verifying the flow of commodities across the supply chain. Processes used in supply chain management, such as order fulfillment, payment reconciliation, and quality control, can be automated.

Intelectual Property

The ownership and distribution of intellectual property, including works of art, music, and written works, can be managed using smart contracts. NFTs are frequently used for this. Smart contracts give authors the ability to specify license conditions, automate royalties, and guarantee equitable distribution of digital goods.

Government Processes

Smart contracts can help safe and transparent voting processes by assuring the validity of ballots, eliminating fraud, and enabling immediate results tabulation. This could aid in improving democratic processes' transparency and trustworthiness.

How Are Smart Contracts Operated?

Code execution, decentralized consensus, and blockchain technology all work together to ensure that smart contracts run smoothly. Here is a brief description of how smart contracts' intricate internal workings operate:

1. Development and use

Using a programming language that is appropriate for the blockchain platform (such as Solidity for Ethereum), a smart contract developer develops a smart contract. The contract is subsequently introduced to a blockchain network and integrated into the decentralized ecology of the blockchain. Although Solana and Cardano provide smart contract functionality, developers can also use the widely used Ethereum smart contracts.

2. Code and conditions

A code that establishes the specifics of an agreement or transaction is contained in the smart contract. These conditions can be as straightforward as a
single payment or as intricate as a multi-step procedure involving numerous participants and data point specifications.

3. Invoking the contract

Anyone with access to the blockchain can use the smart contract after it has been launched by interacting with it. Calling particular contract operations and giving the required inputs are often required to invoke a smart contract.
This could imply that common consumers employ a user interface or program that offers a user-friendly interface to engage with smart contracts, like a decentralized application (DApp) coupled with a cryptocurrency wallet. The user can then choose the desired action (such as purchasing a cryptocurrency token), enter the desired amount, and send a request to complete the trade.

4. Validation and performance

The blockchain network validates the transaction and makes sure that the contract's requirements are satisfied when a smart contract is used. Multiple nodes on the network carry out this validation using a consensus technique, such as Proof of Work (PoW) or Proof of Stake (PoS).

5. An unchangeable record

The smart contract's code is automatically carried out after the criteria are verified and consensus is attained, and the transaction is then recorded as an unchangeable entry on the blockchain. This entry may contain all pertinent information about the transaction, making it visible and auditable, depending on the blockchain.

6. Completion

A smart contract's execution is final and irreversible since it is recorded on a decentralized, impenetrable blockchain. This guarantees the security and integrity of the transaction, guarding against fraud or unauthorized alterations.

What Drawbacks Exist for Smart Contracts?

While smart contracts have many benefits, there are a few disadvantages as well. Some drawbacks of smart contracts include the following:

1. Dependence on outside data

Oracles are external data sources that smart contracts often use to access data from the outside world. Although smart contracts themselves are impervious to manipulation, these oracles can introduce potential flaws or errors since they are prone to manipulation and tampering.

2. Bugs in the code

Like any software, smart contract code may include flaws or faults that could be abused by bad actors. Implementation of design mistakes in code might result in security flaws that could cause monetary loss or other undesirable outcomes. To protect consumers from these risks, smart contracts must undergo extensive testing prior to deployment.

3. Scalability

Blockchain networks may experience performance and scalability problems as they get bigger and more popular. The speed and effectiveness of smart contract execution may be impacted by blockchain networks' constraints, especially in situations of heavy demand.

4. Impermanence

A smart contract becomes immutable, or unchangeable, once it is distributed and carried out on a blockchain. Although this is sometimes cited as a feature of smart contracts, it can also present issues if the code contains faults or defects or if the contract needs to be altered as a result of evolving conditions.

How Are Issues With Smart Contracts Fixed?

The crypto community is actively attempting to overcome the downsides and difficulties connected with smart contracts. To encourage white hat hackers, developers, and researchers to find and responsibly reveal flaws in smart contract code, several crypto platforms, for instance, provide bug bounty programs with large payments.
In-depth security audits are another service provided by smart contract audit companies, which help to find and fix flaws in smart contracts. They want to adhere to best practices for secure coding, such as formal smart contract verification methods, code reviews, and testing.
The development community also shares the objective of improving the processes used in developing smart contracts by developing tools, frameworks, and standards. Standardization initiatives focused on creating standardized interfaces, protocols, and formats for smart contracts are one method to achieve this. This can facilitate the integration of smart contracts with other protocols and assure compatibility between various blockchain platforms, facilitating seamless interactions.

Concluding Remarks

Digital agreements that are self-execute such that there is no need for a middleman to enforce the terms of the contract are known as smart contracts. They make use of blockchain technology to offer efficiency, security, and transparency. Traditional company operations could be revolutionized by smart contracts, which enable safe and automated transactions, save costs, and add new functionalities.
There are certain issues with smart contracts as well, but the crypto community as well as other protocols are actively attempting to fix them through continual development, security measures, and testing. We can anticipate further innovation and adoption as smart contract technology develops, helping to shape the future of decentralized and trustless transactions.

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